Taking care of business means different things for different people. For more than 12 million Americans (10.1% of the U.S. population), according to the 2015 U.S. Bureau of Labor Statistics, taking care of business means being self-employed. Yes, setting one’s own hours and schedule can be terrific. And, for many people being self-employed can be its own reward; however, for those who eventually want to retire, it can also be challenging.
Flexibility and adaptability toward work are distinct characteristics that spill over into the self-employed’s attitude toward retirement planning. Almost 70% of respondents to a report by Transamerica Center for Retirement Studies (TCRS) and the Aegon Center for Longevity and Retirement (ACLR) envision a fluid transition into retirement. These individuals predict that they will either gradually slow down before they fully retire or continue to work occasionally through retirement, or just not retire at all. And, their reason for continuing to work in retirement is because they enjoy what they do and want to keep engaged.
While this mindset is great, it is also more important than ever for those who are self-employed to be prepared for self-retirement. And part of that preparation is saving, investing and planning for retirement. It’s critical for these individuals to ensure that the monies are there when, and if, they are ready to retire.
However, for many people who are self-employed this is not a reality. In fact, the majority of small business owners surveyed by BMO Wealth Management have less than $100,000 saved for retirement. Since many of these respondents don’t have a succession plan for when they are ready to retire, a few noted that they are hoping to turn the business itself into a retirement plan. A small number of respondents (8%) have over $500,000 saved for retirement, and an even smaller number (4%) have over $1 million.
Self-employed means self-retired
The self-employed have a much greater personal responsibility for funding their retirement compared to employed workers since they don’t have access to employer-sponsored retirement benefits. And, people who are self-employed tend to want to have control—over their work and their life. So it makes sense that they would want to decide for themselves how to prepare for retirement.
It’s relatively easy to be retirement ready. And, being a self-starter can help in establishing the tax-advantaged retirement plan that works best, whether it’s a traditional IRA, a Roth IRA, or a SEP.
- Self-employed Americans can save for retirement in an individual or solo 401(k), which allows them to contribute up to $18,000 per year, or $24,000 if they’re 50 or older.
- They can also contribute an additional 25% of earnings (up to a maximum of $53,000 in 2016, or $54,000 in 2017) as “employer” contributions.
- A solo 401(k) can be used by self-employed workers to cover themselves and their spouse, and still be exempt from discrimination testing.
- A SEP (or Simplified Employee Pension plan) allows self-employed individuals and small-business owners to make contributions toward their retirement and that of their employees, if applicable, with some excellent tax advantages. These plans are typically offered in companies with 25 employees or less and a separate account must be set up for each employee.
Self-directed retirement plan
Savvy investors can also self-direct their retirement savings and include alternative investment options not allowed within typical retirement plans. For instance, self-directed IRAs can invest in real estate, mortgage, private hedge fund, precious metals, and many more non-publicly traded assets. For individuals who already know and understand nontraditional investments and like to control their investment decisions, self-direction can be a great way to build retirement wealth.
No matter what business you are in, Next Generation Trust Services professionals are available to answer questions about self-directed retirement plans and our transaction specialists ensure you are investing within IRS guidelines. Since we do not give investment advice, we strongly recommend you consult your trusted financial advisors about your investments and any tax implications they have for your unique situation. Contact us at (888) 857-8058 or Info@NextGenerationTrust.com, or read through our Starter Kits for more information or to open a new self-directed retirement account.